With the recent legalization of marijuana in a few states, medical dispensary businesses are being impacted by a tax law implemented by the federal government. As marijuana is still illegal under federal law, these tax laws are still being enforced, while some fundamental state right issues exist, says Rob Wood, tax attorney with Wood, LLP in San Francisco. "It is unfortunate that there's a mismatch between state and federal law and I think there are much better ways of handling it than the federal government is currently doing," says Wood.

The tax law is in the Internal Revenue Code and not done to target medical marijuana, notes Wood. It is a tax law provision in 280E of the tax code, which says that you get no tax deductions if you're a drug trafficker. Wood says this tax code was designed to prevent drug traffickers from claiming tax deductions and the IRS is saying that they have no choice but to enforce it.

Additionally, regardless of the type of business entity, a business pays tax on its net income, however in the medical dispensary business, says Wood, they are getting taxed on the gross income and that's "not only punitive but it can drive them out of business."

Wood believes that there is "no perfect way around it until the law is changed."